XAUUSD XAUUSD XAUUSD

Gold and silver consolidate after surge

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Gold and silver, two of the best-performing assets in 2020, have both run into an overdue correction following a three-week surge. Real yields and the dollar have both stopped falling and these two continue to be the main source of inspiration. Gold is now set to be engulfed in a battle between short-term technical traders looking to sell, as the steep uptrend is broken, and longer-term buyers who missed the first move above $2000/oz


What is our trading focus?

XAUUSD - Spot gold
XAGUSD - Spot silver
XAUXAG - Gold-Silver ratio
IGLN:xlon - iShares Physical Gold
ISLN:xlon - iShares Physical Silver

____________________________________________________________________________________________________

UPDATE from August 12: Spot Gold (XAUUSD) and Spot Silver (XAGUSD) - need to consolidate following the three-week surge turned ugly yesterday when both markets collapsed by much more than would normally be expected during a normal correction. Gold dropped below $1920/oz, the previous high from 2011 while silver collapsed by 18% in just two days. While a small bounce in US real yields, a stabilizing dollar and raised vaccine hopes were the triggers, there is no doubt that a lot of hot money recently had rushed into the markets, especially into silver ETF’s. Having both corrected 50% of the June to August surge we think the sell-off has gone too far and a close today near the highs on both metals could potentially signal the early end of a very deep but needed correction.

Gold was trading quietly around $1800/oz when I started my annual summer holiday in mid-July. Fast forward three weeks and the market has rallied by more than 250 dollars before so far giving a quarter of that back in an overdue correction. Silver meanwhile jumped by 50% to reach a value priced in gold close to the ten-year average.

Gold and silver are two of the best-performing assets this year, putting the much hyped technology heavy Nasdaq in the shade.

Why now?

Why did these two metals burst into life in such a dramatic fashion at a time when risk appetite for stocks was strong and economic data had started to stabilise. There are several reasons, one of course being the time of year when liquidity tends to be reduced as traders vacate their desks for the beach. But overall the renewed weakness in U.S. real yields and sudden drop in the dollar were the two main catalysts that helped trigger the rally.

Since gold broke above $1400/oz last June to begin its rally, we have been highlighting the importance of real yields. Some of the major moves in gold during the past decade often started with developments in the bond market. The real yield is the return an investor gets on holding a bond position once the nominal yield has been reduced by the expected inflation during the life of the bond. Rising inflation expectations would normally increase the nominal yield as investors would want to be compensated for the lower real return.

Yield-curve control which has been mentioned as the potential next step by the U.S. Federal Reserve locks the nominal yield at a certain maturity at a certain level above which the central bank steps in and buy whatever bonds are on offer in order to prevent yields from rising any further. Such a development would make fixed-income investments utter useless as a safe haven asset, especially into a period where inflation is expected to make a comeback. Not only due to the massive amount of liquidity that central banks have provided but also due to unprecedented government stimulus creating the political need for higher inflation to support rising debt levels.

The U.S. bond market has since April behaved as if yield-curve control was already in operation. While the yield on U.S. ten-year Notes (above chart) have been anchored within a relatively tight range, the real yield and breakeven have moved in opposite directions. A development supporting the fundamental investment case for holding precious metals in a balanced portfolio.

Falling real yields help support another gold friendly development as it helped drive the dollar lower. The Bloomberg Dollar Index dropped to a two-year low while the euro reached €1.19 before profit taking emerge on Friday when, as real yield reversed higher following a stronger than expected U.S. job report.

What happens now?

The weakness seen since Friday’s stronger-than-expected U.S. job report has kicked off a battle between short-term technical traders looking to sell, as the steep uptrend is broken and longer-term buyers who missed the move above $2000/oz. Gold’s ability to frustrate will be on display over the coming days as the market consolidates. We see support at $1980/oz followed by the very important $1920/oz level, the former top from 2011.

Source: Saxo Group

Overall we maintain a bullish outlook for gold and silver with loose monetary and fiscal policies around the world supporting not only gold and silver but potentially also other mined commodities. Real rates - as highlighted earlier - remains by far the biggest driver for gold and the potential introduction of yield-curve control combined with the risk of rising inflation – as the U.S. authorities are looking to overstimulate the economy - should see those rates remain at record low levels, thereby supporting demand for metals.

An increasingly fraught U.S. elections season combined with current U.S. – China tensions are likely to add another layer of support through safe-haven demand. The potential for even lower real rates should also support a continued weakness of the dollar, thereby creating the trifecta of drivers that should support investments in precious metals.

Silver’s roller-coaster year from $18.5/oz in February to $12/oz in March and now $28/oz highlights the often extreme volatility that this semi-precious metal can produce. Silver’s strong surge has apart from the strong momentum attracting new investors, been driven by a combination of its relative cheapness to gold – now removed – and the tailwind coming from rising industrial demand.

Not least from a continued pick up from solar panel producers as the move towards de-carbonisation continues to gather speed. The potential demand additions could over the coming years push silver into a sustained deficit, similar to the 2006-2011 period which culminating in silver almost reaching $50/oz.

Source: Saxo Group

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992